Employment and the Australian Dollar – Like Any Modern Relationship, it’s Complicated
The Economist magazine published an article last month, lauding Australia’s economy as the most successful in the rich world - blessed with iron ore and natural gas for wares, within a proverbial small boat ride to China. You can read it here.
However, our 27 years of uninterrupted economic growth and development buoyed by a once-in-a-lifetime mining boom has coincided with some rather large changes to the structural composition of Australia’s economy.
Afflicted by a severe bout of “Dutch Disease”, it appears jobs in Australia’s traditional industries such as manufacturing and agriculture have declined significantly; while at the same time those located in the service industries have increased and now constitute a larger proportion of total employment.
So, what’s Dutch Disease, you ask?
Well, former Governor of the Reserve Bank of Australia, Glenn Stevens, aptly described the symptoms of this disease in one of his speeches back in 2013 when he was reminiscing the post-years of the Aussie dollar float:
“A country with an endowment of natural resources will find that when those resources command high prices, it will have a high exchange rate and low manufacturing ‘competitiveness’, compared with the situation when the terms of trade are low. The high resources prices draw factors of production towards the resources sector, pushing up labour costs for other sectors and drawing capital from abroad, so pushing up the exchange rate. The terms of trade rise is an income gain, and may well prompt an expansion in investment in the resources sector. Hence aggregate demand is likely to increase, which among other things will also require a higher exchange rate than otherwise to maintain overall balance. These forces diminish ‘competitiveness’ for other traded sectors. At a later stage, when those adjustments to the capital stock have occurred, the exchange rate may be lower than at its peak, though still higher than what would have been observed had the terms of trade not risen.” (Full speech).
According to ABS National Labour Force figures, Manufacturing was the largest ANZSIC employment division in February 2000 with 1,053,000 employed persons. In August 2018, this had fallen to 956,000 persons (over 9% decline), and to a ranking of sixth across all nineteen industry divisions.
Similarly, Agriculture, Forestry and Fishing has dropped 116,000 jobs since February 2000, moving it from ninth to fourteenth place.
But, it has somewhat been a zero-sum game.
The clear winners have been those working in Health Care and Social Assistance, where jobs have grown substantially in this sector to become the largest employer of Australians today.
In February 2000 this division employed 818,000 persons, or 9.35% of total employed, and was ranked third in total jobs. By 2009 it was ranked first, and in August 2018 it employed 1,678,000 persons - almost 13.3% of Australia’s total employed persons.
Professional, Scientific and Technical Services has also seen an outstanding surge in jobs from 567,000 in 2000 to around 1,071,000 in August 2018, which has moved the division from the seventh largest industry employer to fourth.
Jobs in Education and Training also rose from 590,000 to 1,033,000 persons, moving it from sixth to fifth largest employer.
So, with all this structural change that has apparently rewoven Australia’s jobs fabric, I asked myself the question: “what do the numbers say about a mining boom-inspired assurgent Australian dollar affecting the competitiveness of our traditional export-orientated industries such as Manufacturing and Agriculture?”
Because we are interested in knowing whether there is the association between the exchange rate and employment and - if so - how strong that relationship is, we first assign employed persons as the dependent variable (y-axis) and the AUS/USD exchange rate as the independent variable (x-axis) - the sample period is from February 2000 to August 2018.
The regression line, or line of best fit, shows the hypothetical line that is plotted through the middle of the data plot consisting of the corresponding values for each variable over time. The coefficient estimates of the linear model, b0 (y-axis intercept) and b1 (slope) describe the regression.
The regression for total employed persons in all industry divisions shows a correlation of 0.58, indicating a relatively strong, positive association.
With an adjusted R2 value of 0.32, this indicates that the variation in the exchange rate explains 32 per cent of the variation in total employed persons in Australia.
Breaking the analysis down further to the division level, the results tabulated below indicate a statistically significant linear association between the exchange rate and employed persons at the 5 per cent significance level (i.e. p<0.05) for all individual ANZSIC divisions except Information Media and Telecommunications.
In other words, while the association between the exchange rate and employed persons in the Information Media and Telecommunications division does not fit a linear model very well, there appears to be reasonably robust associations between jobs and the exchange rate across all other divisions.
The bottom line
Manufacturing and Agriculture, Forestry and Fishing are negatively correlated with the exchange rate over the past couple of decades and during this time an appreciation in the dollar is associated with a significant decline in jobs.
Of course, China’s demand for Australia’s mined resources over recent decades has been a key factor bolstering the Australian dollar.
The findings indeed suggest Australia has suffered a bout of Dutch Disease - and the symptoms are strongest with respect to jobs across Agriculture, Forestry and Fishing.
Now to the instigator – Mining.
We see that Mining, in contrast, has a strong and positive association with the exchange rate – as one should expect.
According to the Mineral Council of Australia, exports of Australia’s resources during 2017-2018 were a record high $220 billion and contributed 55 per cent to Australia’s total exports.
While Mining employs a relatively small proportion of the labour force, around 245,000, it is Australia’s golden goose; and it continues to fill the coffers which circulate throughout the economy to grow the services sector.